Air Canada’s decision to scale back its growth plans in the face of mounting fuel costs led UBS analyst Tasneem Azim to lower her earning estimates for the airline Thursday.

The country’s largest carrier announced this week it planned to scale back some of its less profitable flying in order to offset mounting fuel costs.

Air Canada has already been raising the price of its fares and its fuel surcharges to offset the rapid rise in jet fuel, which, up until last month, had had not negative impact on demand.

But Air Canada’s load factor – or average amount of seats filled on its planes – did fall slightly in February, which makes it harder for the carrier to continue to raise prices.

The airline said Wednesday it now planned to slow its capacity growth to between 4.5% and 5.5% this year, down about a percentage point, to keep capacity more in line with demand.

As a result, Ms. Azim reduced her earnings outlook for the year, but said she was keeping her “buy” rating on the stock.

“We believe there is downside risk to our estimates from higher fuel costs,” she said in a note to clients. “While [Air Canada] may continue to raise base fares or fuel surcharges to absorb higher fuel costs, in doing so it runs the risk of discouraging demand. The airline will likely consider further capacity adjustments should fuel prices continue to accelerate.”

She said she expects 2011 earnings per share of 13¢ compared to 34¢ a share previously, and she lowered her price target to $3.75 a share, from $4.25 previously.